Should I Use Qualified Charitable Distributions?

Beginning in 2018, there were significant changes to the allowable itemized deductions that could be taken on Schedule A and the standard deduction was increased substantially.

As a result, many taxpayers are no longer be able to itemize deductions which means they don’t receive a tax benefit for making charitable gifts.

However, there still remains a very appealing tax-planning option for folks who are age 70.5 and older called a Qualified Charitable Distribution (QCD).

What is a Qualified Charitable distribution?

A Qualified Charitable Distribution is a direct gift from an IRA (including traditional, rollover, inherited, SEP, and SIMPLE) to a qualified charity.

These distributions have the benefit of satisfying the annual Required Minimum Distribution (RMD) rules while also avoiding income taxes on the distribution — RMDs are taxed as ordinary income.

In fact, QCDs are not included in your adjusted gross income (AGI) at all. Depending on how much you give, this can lower the odds that you’ll be affected by various unfavorable AGI-based rules such as those that can cause more of your Social Security benefits to be taxed and Medicare premiums to increase.

Should i use one?

How do you know if making Qualified Charitable Distributions makes sense for you and your financial situation?

This flowchart will help you get the conversations started with your financial or tax advisor.

things to consider

If you think this strategy is a fit for you, there are some things you’ll want to consider before jumping in head first.

1. Decide early in the year if you want to use a Qualified Charitable Distribution to satisfy your Required Minimum Distribution. The first dollars out of an IRA are considered to be the RMD. If you satisfy your RMD in February but want to do a QCD in November, that income can be excluded, but it won’t offset the income from the RMD taken earlier in the year.
2. Each person can donate up to $100,000 annually using the QCD rule. If you’re married filing jointly, and each of you has an IRA, you can both QCD up to $100,000 per year. Keep in mind that that extra distribution can’t be carried over—i.e., used to meet the required minimum distributions for future years. This contrasts with other strategies, such as a donation of cash and appreciated securities, where a large donation can be made in one year and the tax benefits can be carried forward.
3. Work with your IRA custodian to make sure the QCD is completed correctly. The funds will need to be made payable directly from your IRA to the charity, which means they can’t send you a personal check and you turn around and give it to charity.
4. Make sure your tax preparer knows that you completed the QCD. Your IRA custodian will send you a 1099-R showing the amount withdrawn from your IRA but the QCD may not be clearly identified. If the QCD isn’t properly listed on your tax return, you won’t get the tax benefits of doing it.
5. You can make QCDs to multiple charities, just keep meticulous records for your tax preparer.
6. Verify that the organizations you are giving to qualify. The organization must be a 501(c)(c) and you can’t be receiving a benefit for giving (raffle, sporting event seats, etc.).